So, you've locked in your mortgage rate at the perfect time and you're planning on putting 15% down on your dream home. You may even have a little money left over for updates.
Then you get your Loan Estimate; it shows your expected monthly principal and interest payments, but just like they say on late night infomercials: "But wait, there's more!"
Escrow Payments: If your lender set up an escrow account for your mortgage, each month you'll make an escrow payment to cover your property taxes and homeowners insurance. Your lender will deposit this amount into your escrow account and will pay for both items on your behalf when they are due.
Private Mortgage Insurance: If you made a down payment of less than 20%, PMI will be part of your monthly mortgage payment. While the cost of PMI varies, you can expect to pay between $30 and $70 per month for every $100,000 borrowed. You'll have to pay PMI until you've built up more than 20% equity in your home.
While paying into an escrow account and PMI may initially cause sticker shock for first time borrowers, they are important components of the homebuying process for many owners. Escrow accounts give borrowers peace of mind that their taxes and insurance will be paid in full and on time. Regularly scheduled monthly escrow payments are also a good option for many homeowners because they eliminate the surprise of large annual or semi–annual payments when property taxes or insurance premiums are due.
PMI enables potential homeowners who may be unable to afford a 20% down payment to buy a home and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.
You don't necessarily have to pay escrow or PMI for the life of your loan. You may have the option to cancel your escrow payments to your lender once you have built up at least 20% equity in your home and are current on your payments. If you decide to go this route, just remember that you'll be responsible for paying your taxes and insurance in full and on time. And if you are current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original value of your home. You can also request that your lender cancel your PMI if you have made additional payments or if rising home values have increased your home equity to more than 20%.
The bottom line: Study your Loan Estimate carefully to make sure you understand all the costs involved in taking out a mortgage.
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